Banking & Finance

How a green bond could be used to finance environmental improvements to housing

The green loan market has shown huge growth over the last few years and there is no sign of this abating. Given that there is a wall of money seeking green investment opportunity, are housing associations and local authorities missing out on the opportunity to tap a source of finance for environmental improvements to their existing housing stock?

Green loans are simply loans provided for transparent eligible green purposes. This includes energy efficiency and could include, for example, the retrofitting of housing stock to ensure its increased energy efficiency.

Green loans need to be distinguished from sustainability linked loans. The latter cover loans where their pricing is tied to performance against pre-agreed ESG criteria. Such loans tend to be provided for general corporate purposes, rather than for a specific green purpose.

So, we know there is a huge active green loan/investor market and we know that there is a huge demand for investment in existing housing stock to improve its environmental efficiency. How do we tie the two together?

There have been various initiatives over the year to create an aggregator vehicle to enable smaller and mid-tier housing associations to club together to access the private placement and bond markets. For various reasons, these have generally proved unsuccessful. The market has however now matured considerably, and we have seen many examples of successful issuance by housing associations. To date these have generally involved UK or North American institutions and issuance has generally been in Sterling.

Opportunities however exist to tap green investment demand from other areas around the world. There is also the potential to issue in currencies other than Sterling to take advantage of exchange rate movements with the associated risk being hedged. The profile for loan drawdowns can also potentially be modelled to match investment programmes.

There is nothing really except ambition stopping a single housing association or local authority, or a group of associations and/or local authorities, seeking to tap the green investment market and provide a source of finance for their investment needs.

Chris Dun
Brodies LLP
13/12/19

Chris Dun